1.

General Standards of Conduct for Directors – Business Judgment Rule

The Supreme Court of Korea has held that, under the business judgment rule, where a director’s conduct satisfies certain requirements, the director will not be deemed to have breached the duty of loyalty even if the company ultimately suffers damage as a result (see, e.g., Supreme Court Judgment No. 2015Da70044 rendered on September 12, 2017, among others). The Guidelines presume that the business judgment rule established under such case law also applies to directors’ fiduciary duty to protect shareholders’ interests under the amended KCC, and specify the following requirements as concrete factors that may help directors mitigate liability risk:
 

(1)

Sufficient collection, inquiry, and review of necessary information

1) Provision of substantive information to directors
2) Enhancement of directors’ analytical and decision-making capabilities
3) Strengthening of directors’ review process
4) Engagement of appropriate external professionals
 

(2)

Reasonable belief that the action is in the best interests of the company and its shareholders

1) Maintaining heightened awareness of potential conflicts of interest relating to the relevant agenda item
2) Applying stricter standards of review where conflicts of interest exist
3) Recognizing and taking measures to ensure equitable treatment among shareholders
 

(3)

Exercise of business judgment in good faith

1) Recognizing that board deliberation and resolution constitute a business judgment
2) Considering alternatives
3) Adopting a dynamic approach beyond a yes-or-no binary when the legality of a proposal or a potential breach of duty is at issue
 

2.

Measures to enhance fairness

Against the backdrop of the business judgment rule, the Guidelines indicate that, particularly in transactions where (i) conflicts of interest exist between the company and a director, controlling shareholder, or management, or (ii) conflicts of interest exist between a controlling shareholder and minority shareholders, the company may consider implementing some or all of the below measures to enhance fairness. The Guidelines also emphasize, however, that not every transaction involving a conflict of interest requires such measures. Where the KCC already provides specific mechanisms to address conflicts and those rules alone are sufficient to mitigate concerns regarding a breach of fiduciary duty, additional measures may not be necessary.
 

(1)

Special committee

To ensure the fairness of board resolutions, the company may consider (i) establishing a special committee composed of independent outside directors who have no interest in the relevant transaction and (ii) having such committee review the legitimacy of the purpose of the transaction, the fairness of the transaction terms, and the appropriateness of the transaction process.

The Guidelines address matters regarding the special committee, such as: (a) composition; (b) authority; (c) timing and method of establishment; (d) ensuring access to information; and (e) the engagement of external experts.
 

(2)

Review by independent external experts

As a voluntary measure to enhance fairness, the company may appoint external experts (such as legal or financial advisors) with the expertise and independence to review the transaction’s structure, process, and fairness of terms. The Guidelines stress that the relevant perspective and objective should be the protection of the interests of the company and all shareholders as a whole, rather than those of any particular shareholder.
 

(3)

Full and faithful disclosure to shareholders

For matters presenting conflict-of-interest concerns, it is advisable to clearly explain, from the shareholders’ perspective, (i) the background and criteria behind the decision, (ii) the process of considering alternatives, (iii) whether any conflicts exist, and (iv) the details and limitations of the corresponding measures to enhance fairness. Such explanation should enable shareholders to reasonably assess the procedural and substantive fairness of the decision.
 

(4)

Approval by disinterested shareholders / “majority of the minority”

“Disinterested shareholders’ approval” (or “majority of the minority”) refers to a mechanism under which a transaction may proceed only if it receives approval from a majority of the voting rights held by the shareholders who do not have an interest in the transaction, with such approval procedure announced in advance and conducted at a shareholders’ meeting. Because this mechanism effectively requires the transaction terms to be fair enough to obtain support from disinterested shareholders (i.e., not disadvantageous to minority shareholders), it may, in some cases, contribute to protecting the company’s and all shareholders’ interests. However, the Guidelines note specific issues and potential adverse effects and therefore state that it is difficult to recommend this mechanism as a generally applicable measure to enhance fairness.
 

3.

Review by type of transaction

The Guidelines note that, during the legislative process introducing the amended duty of loyalty, concerns were raised that, in various types of corporate restructuring (including mergers), the interests of a controlling shareholder may be favored at the expense of the broader base of ordinary shareholders. In practice, intra-group mergers and going-private transactions are cited as representative transaction types where conflicts between controlling and minority shareholders are particularly acute and where harm may arise not so much to the “company” directly, but rather to its “shareholders,” making such issues difficult to address solely through the traditional concept of “company loss.” Against this backdrop, the Guidelines provide specific standards of conduct for directors in intra-group mergers and going-private transactions as set forth below. For other forms of restructuring, the Guidelines indicate that directors may seek appropriate standards of conduct by reference to the Guidelines’ general standards of conduct and measures to enhance fairness, as well as the detailed discussion of the two transaction types above.

For intra-group mergers, the Guidelines discuss the following measures to enhance fairness: (a) ensuring circumstances that approximate an arm’s-length transaction between independent parties; (b) ensuring the appropriateness of the merger ratio/price; and (c) providing full and faithful disclosure. For going-private transactions, the Guidelines discuss the following measures to enhance fairness: (a) submission by the target company of a statement of opinion regarding the tender offer; (b) verification of the fairness of the tender offer price; and (c) review of fairness in the process of a cash-out share exchange.